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Earnings Embolden Litigious SCO

Updated from 7:52 a.m. EDT

SCO Group (SCOX) , the feisty gatekeeper to much Unix technology, earned $3.1 million in its third quarter and said it laid in enough cash flow to continue suing everyone over its intellectual property.

Lindon, Utah-based SCO earned $3.1 million, or 19 cents a share, on revenue of $20.1 million, compared with a loss of $4.5 million, or 35 cents a share, on revenue of $15.4 million a year ago. Third-quarter revenue from its operating system platforms was $12.8 million, while revenue from its SCOsource licensing initiative was $7.3 million. The initiative involves generating license revenue from the intellectual property that SCO claims in a controversial suit against IBM (IBM) has been misappropriated in Linux open-source software.

"These results have strengthened our balance sheet and overall financial position," SCO said. "We intend to use this capital to continue our intellectual property protection and licensing initiative as well as for launching SCOx, our Web services strategy."

The comments wouldn't rate notice but for the fact that SCO shares have been on a tear (recently curtailed) after the company sued IBM in March, alleging the computer giant misappropriated its Unix code for Linux business. IBM filed a countersuit Aug. 7, claiming SCO breached the general public license for Linux and infringed on four IBM patents.

SCO has threatened numerous other suits and retained all-purpose litigator David Boies for its dirty work. On a conference call Thursday morning, the company said it has budgeted about $1 million per quarter for legal costs, but incurred less than $500,000 in the third quarter in legal charges. In addition to paying discounted fees, SCO will pay Boies a portion of any money generated from the suit, the company said.

The quarter marked the second consecutive one in which SCO has operated in the black, thanks to its licensing initiative. Microsoft (MSFT), whose proprietary software has been threatened by Linux, and Sun Microsystems, a Microsoft foe, are the only two companies who have publicly disclosed deals to license SCO software, netting SCO $13.3 million in 2003.

This week SCO announced another Fortune 500 company has signed a license, but declined to disclose its name and terms of the agreement. The company has said there are 2.5 million servers with its software; it is charging an introductory licensing fee of $699 per CPU.

"Obviously, the opportunity is in the multi-billions of dollars," SCO CEO Darl McBride said in the conference call. "We've always said SCO needs to be compensated for the infringement that has gone on with Linux."

Before launching its licensing program, SCO was suffering declining revenues, like much of the tech industry hurt by the economic downturn. Last year, faced with lower-than-anticipated revenue, SCO announced a restructuring that included cutting 15% of its staff, or 73 employees, bringing the total workforce to 400 employees.

The company expects fourth-quarter revenue of $22 million to $25 million, with $10 million to $12 million coming from its new licensing campaign. "The magnitude of our SCOsource licensing opportunities and our confidence in the SCOsource revenue pipeline is growing each quarter," it warned.

SCO also took on charges from detractors that insiders have been selling shares in large numbers. In a separate press release, SCO noted that four executives have been selling through a plan that establishes sales at predetermined times and under specific conditions, without subsequent instructions from the participants. Such plans are often set up to avoid violation of insider trading rules.

In the third quarter, individuals selling stock under such plans sold 88,000 shares. Two other executives without such plans sold 29,616 shares during that period on their own initiative. McBride pointed out on the conference call that he has not sold any of his shares.

SCO shares gained 91 cents, or 9%, Thursday to hit $11.84 in recent trading. That's more than 10 times their value on Feb. 13, the low for the year.

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